maandag 4 februari 2013

An Abney and Associates International Blog: As the Dow Soars, How High Can Tech Stocks Go?

Last Friday,
the Dow Jones Industrial Average — the benchmark stock index of America’s blue
chip companies – closed above 14,000 for the first time since the financial
meltdown sent the U.S. economy into the worst crisis in decades. The continued
resurgence of the U.S. auto industry and growing optimism about the overall
economy helped propel the Dow above the psychologically important 14,000 point
level. The surging Dow is an indication of the increasing financial health of
the largest American companies, a bright spot in an otherwise shaky U.S.
economic recovery, particularly with respect to unemployment.

America’s
blue chip firms — including industrial giants, banks, and auto companies — are
healthier than they’ve been in years. But what about the largest U.S. tech
companies? Like the other major stock indices, the tech-heavy Nasdaq index is
at or near multi-year highs. On Friday alone, the Nasdaq rose 1%, nearly
touching the index’s five-year high, which it hit last September, driven in
part by tech juggernaut Apple, which had just released the iPhone 5. But Wall
Street sentiment has soured on Apple in recent months, somewhat tempering the
Nasdaq’s continued ascent.

How high can
tech stocks go? Given Apple’s size — it’s the largest tech company in the world
— it makes sense to begin any forward-looking evaluation of the Nasdaq with the
Cupertino, Calif.-based cash machine. Apple constitutes about 12% of the
Nasdaq’s valuation, and there’s no question the company’s recent stock swoon
has placed a drag on the tech-heavy index. Let’s take a look at Apple and three
other important Nasdaq companies.

Two weeks
ago, for the third consecutive quarter, Apple fell short of analyst estimates,
sending the company’s stock down 10% in after-hours trading, wiping out nearly
$50 billion in shareholder value. Although it reported record financial
results, Apple’s slowing growth rate has spooked investors, who are growing
increasingly concerned about the next stage in the company’s epic story.

Can Apple
maintain its heretofore astonishing growth-rate on the back of existing
products like the iPhone and the iPad or does the company need new,
breakthrough products? Investors seem to think the latter, which explains why
its stock has declined 26% over the last six months. As the largest single
component of the Nasdaq index, Apple’s continued growth is crucial for the
tech-heavy stock tracker.

If there’s a
true standout among big tech stocks, it’s clearly Internet titan Google, which
hit a record high on Friday, closing up 2.6% to $775.60, the highest value
since the company went public in August 2004, according to Bloomberg. As rival
Apple has stumbled, Google shares have increased 30% over the last year. Google
now has a market capitalization of $250 billion, with $50 billion cash on hand.
Not bad for a 15-year-old academic project.

Another
bright spot for the Nasdaq is social media colossus Facebook. After a rough few
months following the company’s controversial initial public offering, Facebook
shares have soared over 30% in the last three months. Last month, Facebook
delivered a strong earnings report, with mobile revenue surging from 0% to 23%
of total revenue in just one year. That’s another figure that will only
increase.

“Today there
is no argument,” Facebook CEO Mark Zuckerberg told Wall Street analysts.
“Facebook is a mobile company.” The company’s overall ad sales growth is
booming, increasing in the fourth quarter by 41% to $1.3 billion. As the
largest of the new class of Nasdaq’s stocks, Facebook’s continued success is
crucial for the tech-heavy index, which endured withering criticism of its
handling of the IPO.

If the
Nasdaq has a compelling underdog story right now, it’s a company called
Blackberry, formerly known as Research in Motion. (Why it took so many years
for the company to make this obvious branding change is beyond me.) Practically
left for dead just six months ago, Blackberry is up a whopping 49.6% over the
last three months. Last week, Blackberry unveiled its long-awaited Blackberry
10 operating system, and unveiled two slick-looking new Blackberry phones.

Taking
several pages from the Apple/Google playbook, Blackberry announced a
marketplace for music and movies, and an app catalog that will include more
than 70,000 apps at launch, as TIME’s Techland reported. Blackberry shares are
still down over 80% since their 2008 peak, but if the company can launch a
product that genuinely competes with Apple and Google, that will be good for
the tech sector, because competition spurs innovation, and innovation drives
the Nasdaq.

It’s
important to remember that the health of stock market indices does not
necessarily correspond with the overall health of the U.S. economy. In fact,
there’s frequently little connection at all. Stock markets are driven by
corporate profits, which seem increasingly disconnected from the health of the
U.S. consumer, a key driver of the economy. Still, rising corporate revenues,
profits, and stock prices are an unambiguously good sign for the U.S. economy.
And tech companies are a key element of overall U.S. corporate health.

What drives
tech revenues and profits? Consumer and corporate spending. There’s no doubt
that investors have grown skittish about Apple, which is weighing on the
Nasdaq. But overall, U.S. stock market indices and other key economic measures
appear to be contributing to a virtuous cycle — however halting — that will
ultimately benefit investors.